The CF slide below shows very clearly the US competitive edge when it comes to making anything that has a natural gas base, and while we tend to talk mostly about ethylene, ammonia, urea, other ammonia derivatives, and methanol are all seeing significant cost advantages. The Chinese coal-based costs are better than those in Europe and Asia based on natural gas but margins remain well below those in the US. The challenge with the coal-based chemistry in China is that it has substantial CO2 emissions, and the facilities were not designed for carbon capture. As China develops a carbon cap and trade market and as these facilities get included, costs will rise significantly.
Source: CF Industries – 4Q21 Earnings Release Presentation, February 2022
Separately, it is important to note how much more US oil production is possible if investment levels step up to reflect the economics generated by current pricing – anything that the linked headline says would happen with oil at $100 per barrel would make sense at today’s price. Where governments appear to have got it wrong, in our view, is with their expectations of energy demand – note the industrial production strength in Exhibit 1 (from today's daily report) – as they should have been more accommodating concerning encouraging higher levels of production of every source of energy. The decline rate in the oil chart below shows just how much investment is needed to keep supply flat and with the lack of support from both government and investors in the US it is not surprising that we are short and prices are high.
Source: EIA – Today In Energy, February 2022
